ATE Policy Deemed Insufficient Security For Costs Due To Fraud Avoidance Risk And Drafting Deficiencies

LLOYDS DEVELOPMENTS LIMITED V ACCOR HOTELSERVICES UK LIMITED [2025] EWHC 1238 (TCC)

In Lloyds Developments Limited v Accor HotelServices UK Limited [2025] EWHC 1238 (TCC), the court addressed an application by the defendant, Accor, for further security for costs against the claimant, Lloyds, which was in administration. The primary costs issues centered on whether an After the Event (ATE) insurance policy could substitute for a payment into court as security, the adequacy of the proposed ATE policy, and the quantification of further security. The court applied CPR Part 25.26–25.29 – the discretion to order security where a claimant’s inability to pay costs is demonstrated. The ATE policy, accompanied by an Anti-Avoidance Endorsement (AAE), was scrutinised for real risks of non-payment, particularly regarding clauses allowing insurer avoidance for fraud (Clause 11.15) and termination of the litigation funding agreement (Clause 4(ii)(d)). The court found drafting deficiencies, including an unsevered link between the Security Claim definition and Insured Liability, creating a lacuna that could undermine Accor’s protection. While acknowledging ATE policies’ potential adequacy (citing Asertis Ltd v Lewis Barry Bloch [2024] EWHC 2393 (Ch) and Re Ingenious Litigation [2020] EWHC 235 (Ch)), the judge held the policy insufficient due to unresolved risks of avoidance and insufficient clarity on fraud exclusion (applying Candy v Holyoake [2017] EWCA Civ 92). The court permitted Lloyds 10 days to amend the policy to address these issues, failing which further security of £882,336 would be required, covering agreed categories such as disclosure hosting (£185,196), expert costs (£240,000), and trial preparation (£400,000). The outcome deferred final determination pending policy revisions or further submissions on adequacy.

It may well be that this is an unintentional lacuna and one that is readily fixed: the suggestion that substituting the word 'the Claimant' for 'the Policyholder' (or adding it with 'and/or') was accepted, rightly, by Mr Blackett as something that would close the lacuna. Whilst therefore this is an insufficiency which means that I am not prepared to order that ATE Insurance in line with this draft policy may be an adequate alternative to paying into Court, for the reasons that I have already explained, I am prepared to give Lloyds some time to seek to deal with the point satisfactorily.

Citations

Lewis Thermal Ltd v Cleveland Cable Co Ltd [2018] EWHC 2654 (TCC) An ATE insurance policy proposed as security for costs must contain wording which ensures the obligation to pay is not subject to exclusions that create a real risk the insurer may not pay, especially where there are allegations of fraud in the underlying action. Re Ingenious Litigation [2020] EWHC 235 (Ch) A payment into court may not be replaced with alternative security, such as an ATE policy, unless any deficiency in that policy is addressed in advance and a material change in circumstances justifies revisiting the form of security. Recovery Partners GB Ltd v Rukadze [2018] 1 WLR 1640 The court has discretion to release or vary an undertaking or existing security only where justified by factors such as hardship, change in circumstances, or material difference in security quality, placing the burden on the party seeking release. Asertis Ltd v Lewis Barry Bloch [2024] EWHC 2393 (Ch) An ATE policy is not adequate security if there remains an “unjustifiable element of doubt” about its enforceability, particularly where the insurer retains rights that could prevent payment due to fraud or misrepresentation. Saxon Woods Investments Ltd v Costa & Ors [2023] EWHC 850 (Ch) An ATE policy with clear, specific anti-avoidance language that waives the right to avoid for fraud can amount to sufficient security for costs, but this sufficiency is determined by the precise policy wording and context. Versloot Dredging v HDI Gerling Industrie Versicherung AG [2013] EWHC 658 (Comm) The court must take a pragmatic and realistic approach in deciding whether security proposed, such as through an ATE policy, offers real protection equivalent to a payment into court. Shlaimoun v Mining Technologies International Inc [2012] EWCA Civ 772 Realistic rather than theoretical concerns about security must be assessed by examining whether the security amounts to an obligation likely to be honoured by a creditworthy and enforceable entity. Premier Motorauctions Ltd v PricewaterhouseCoopers LLP [2017] EWCA Civ 1872 An ATE policy will be inadequate as security if there is a realistic possibility of avoidance for non-disclosure or non-provision of placing information, especially where the policy contains no anti-avoidance endorsement. Candy v Holyoake [2017] EWCA Civ 92 An insurance policy presumed to provide costs security will not be deemed adequate if its anti-avoidance provision does not expressly exclude fraud, given the established principle that exclusion of fraud must be clear and unequivocal. HIH Casualty & General Insurance Ltd v Chase Manhattan Bank [2003] 1 All ER (Comm) 349 To exclude the consequences of fraud in an insurance contract, any such exclusion clause must use clear and unmistakable terms; general language is insufficient to deprive an insurer of the right to avoid for fraud. Regus (UK) Ltd v Epcot Solutions Ltd [2008] EWCA Civ 361 Clauses that purport to exclude liability must be strictly construed and will not exclude liability for fraud unless the exclusion is expressed in clear terms. Trident Turboprop (Dublin) Ltd v First Flight Couriers Ltd [2008] EWHC 1686 (Comm) Courts will not construe general exclusion clauses as depriving a party of remedies for fraud; specific and unambiguous drafting is required to prevent reliance on such remedies.

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Key Points

Where ATE insurance is proposed as security for costs, the relevant test is whether there is a real, as opposed to fanciful, risk that the policy will not respond in full to an adverse costs order; the court adopts a pragmatic and realistic approach in evaluating whether the security is sufficient. [16]
Clauses within ATE insurance policies that purport to exclude an insurer’s right to avoid the policy for fraud must be expressed in clear, specific and unequivocal terms; general wording is insufficient to exclude such rights, especially where serious allegations of fraud are in issue. [34–36, 44–46]
A defectively drafted ATE policy or endorsement that creates a realistic risk of non-payment under a security claim—whether due to policyholder identity, definitional gaps, or linkage to other undisclosed documents—will not be accepted as adequate security for costs. [23, 24–28]
Once a payment into court has been ordered as security for costs, it will not usually be varied to permit substitution with ATE insurance unless a material change in circumstances can be demonstrated or unless the existing method presents hardship or causes unfair prejudice. [14, 53]
On applications for further security for costs, the court exercises a broad discretion and adopts a protective approach to the defendant; any credible potential shortfall is resolved in favour of awarding additional security, particularly where the defendant would otherwise be unsecured. [52, 57]

"I have found, that at present, the policy before the Court does not provide equal protection as a payment into Court. I am not presently prepared to permit Lloyds to rely upon it in lieu of a payment in. However, in the circumstances I have described in which Accor failed to engage constructively in advance of the hearing, I am prepared to provide Lloyds with a further period of 10 days, until 30 May 2025, in which to refine the policy to as to meet the two areas of concern I have identified above. Providing that those concerns are fully met, and providing the policy is in all other respects as per that provided by Ms Emerson in her fifth witness statement, I consider that it will then provide sufficient protection, and that, in my discretion, Lloyds is entitled to rely upon it for the purposes of providing Accor with further security for costs presently sought by Accord. "

Key Findings In The Case

The proposed ATE insurance policy was found to be inadequate security for costs because its anti-avoidance endorsement used general wording that did not clearly and expressly exclude the insurer’s right to avoid liability for fraud by the policyholder, creating a real risk of non-payment in such circumstances [44–46].
The ATE policy contained a clause excluding coverage where the litigation funding agreement had been terminated, and because the terms of that agreement were undisclosed and the mechanism for notification inadequate, this created an unacceptable risk that the coverage could end without Accor being aware, rendering the policy inadequate as security [22–23].
The revised ATE policy named the litigation funder—not the claimant—as the Policyholder, and due to the wording of the policy and endorsement, this resulted in a definitional gap that created a realistic risk that a ‘Security Claim’ could not be made by the opponent, thereby undermining the adequacy of the security offered [24–28].
The court found that, although ATE insurance may in principle be adequate security, Lloyds had not been deprived of access to justice if required to provide security by way of payment into court, as there was no sufficient evidence that imposition of such a requirement would stifle its claim or cause unfair prejudice [51, 53].
The court determined that Accor was entitled to a further £882,336 by way of additional security for its costs, finding that several enlarged elements of costs—including trial preparation, expert evidence, and disclosure management—warranted increased sums, whereas other claims were reduced or disallowed as already accounted for in earlier orders [57–58].

“For the avoidance of doubt, although Ms Emerson intimates in her third witness statement that after placing the insurance, Lloyds will make an application for the money previously paid into Court to be released back to Lloyds, there is no such application before me. Mr Webb KC's skeleton argument specifically reserves the right to make such an application. At present, there is no evidence before me that there is material change of circumstances or other factors such as a particular hardship or difficulty caused by the status quo in respect of the existing orders which warrants payment out of the sums already paid into Court, as opposed merely to entitlement to satisfy further payments yet to be made by way of ATE insurance (see Recovery, cited above).”

Background

The case of Lloyds Developments Limited v Accor HotelServices UK Limited concerned an application by the Defendant, Accor, for further security for costs against the Claimant, Lloyds, which was in administration. The dispute arose from agreements related to the construction and management of a hotel in Glasgow. Prior to this application, Lloyds had already provided £900,000 in security pursuant to an order by Mrs Justice O’Farrell in July 2022, followed by a further £425,000 ordered by Mrs Justice Jefford in May 2024. An additional £600,000 was due to be paid six weeks before the trial, scheduled for November 2026. A further £75,000 was agreed under a Consent Order dated 2 May 2025, subject to potential substitution with an alternative form of security. The total security provided or ordered stood at £2,000,000. Accor sought an additional £1,162,336, while Lloyds accepted liability for a further £617,336 and proposed providing this via an After the Event (ATE) insurance policy rather than a payment into court.

Costs Issues Before the Court

The key costs issues before the court were: (1) whether an ATE insurance policy could adequately substitute for a payment into court as security for costs; (2) the sufficiency of the proposed ATE policy’s terms, including concerns about avoidance for fraud, termination of funding agreements, and sanctions clauses; and (3) the quantum of further security to be provided, including disputes over specific cost categories such as disclosure, expert reports, and trial preparation.

The Parties’ Positions

Accor’s Submissions: Accor argued that the proposed ATE policy was inadequate due to: (a) a clause allowing the insurer to avoid payment if the litigation funding agreement was terminated, which Accor contended was opaque and risky; (b) the potential for the insurer to avoid the policy if Lloyds’ claim was found to be dishonest or fraudulent; and (c) boilerplate exclusions for sanctions under foreign laws, which Accor argued introduced unnecessary uncertainty. Accor also sought a higher quantum of security, disputing Lloyds’ proposed reductions for specific cost categories.

Lloyds’ Submissions: Lloyds accepted the need for further security but contended that the ATE policy, including an Anti-Avoidance Endorsement (AAE), provided sufficient protection. It argued that the policy’s terms were standard and that the risk of avoidance for fraud was overstated. Lloyds also disputed the amount of additional security sought by Accor, proposing a lower figure based on proportionality and the assumption of a 70% recovery rate on costs.

The Court’s Decision

The court held that the ATE policy, in its current form, did not provide equivalent security to a payment into court due to two main deficiencies: (1) the lack of clarity in the policy’s wording regarding the insurer’s ability to avoid liability for fraudulent inception, and (2) a drafting lacuna in the definition of “Insured Liability” arising from the change of policyholder from Lloyds to its litigation funder. The court noted that while ATE policies with AAEs could be sufficient (as seen in Saxon Woods Investments Ltd v Costa), the general wording of the AAE in this case did not expressly exclude avoidance for fraud, creating a real risk of dispute. The court also rejected Accor’s concerns about sanctions clauses as fanciful in this context.

However, the court granted Lloyds 10 days to revise the policy to address these issues. If the revised policy met the court’s requirements, it could be accepted in lieu of a payment into court for the outstanding security (£600,000 plus the £75,000 amendment-related security). The court also determined the quantum of further security, awarding £882,336, accounting for adjustments to specific cost categories such as disclosure, expert reports, and trial preparation.

Finally, the court declined to order the release of funds already paid into court, as there was no evidence of a material change in circumstances or hardship justifying such a step. The parties were given 17 days to agree on the adequacy of any revised policy, failing which the court would determine the matter on written submissions or at a short hearing.

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